Orissa State Civil Supplies Vs. Deputy Commissioner of - Court Judgment

Excerpt:
1. these cross appeals and cross objection arise out of the same order passed by the commissioner of income-tax (appeals). therefore, they are dealt with by this common order.2. the assessee's appeals raises certain legal and constitutional issues of some importance. those issues arise out of the claim of the assessee to exemption under section 11 of the income-tax act, 1961 and article 289 of the constitution of india.3. the assessment was made after making certain additions by disallowing the assessee's claims for shortage and misappropriation of stock. the assessee had claimed exemption of its income under sections 11, and 10(20) on the ground of mutuality. the commissioner of income-tax (appeals) confirmed the order of the income-tax officer rejecting all these claims. hence this appeal.4. before us, the claim to exemption on the basis of section 30(20) and mutuality has been given up and, therefore, the only question which arises is the claim to exemption under section 11.5. the assessee is a state government undertaking wholly owned by the orissa government and assessed in the status of a company. its claim to exemption under section 11 was rejected on the ground that it was not a trust and that no registration was granted to it under section 12a.6. the learned counsel for the assessee submitted that although the assessee was not a trust, its case was covered by explanation 1 to section 13(4) which provides, inter alia, that for the purpose of sections 11,12,12a and this section "trust" includes any other legal obligation. according to him, the assessee held its capital amount in trust for certain purposes which resulted in a legal obligation in nature of a trust. he drew our attention to the resolution dated 27-8-1980 of the orissa government which states as follows :- with a view to implementing the scheme of distribution of essential commodities and to ensure easy availability of some selected items of essential articles of mass consumption at reasonable prices, the question of establishment of a state level civil supplies corporation was under consideration of government for some time past. after careful consideration, government have been pleased to decide that a corporation known as "orissa state civil supplies corporation ltd.' should be formed with the following broad objective. to engage either on its own or as the agent of government or any firm, company or institution in the production, purchase, processing, storage, transport, distribution and sale of foodgrains, foodstuffs and such other essential commodities as it may choose and to provide assistance, advice and services therefore, including capital resources, technical, managerial and other services. the corporation will also be responsible for procurement of essential commodities and to deal in these for equitable distribution.he submitted that this resolution states that the object of establishing the assessee-corporation was to supply essential commodities at reasonable prices and ensure their equitable distribution. therefore, the object of the assessee was relief of the poor and serving the general public utility as provided in section 2(15) which defines "charitable purposes". in this connection, he also invited our attention to the following evidence :- (1) letter dated 20-4-1990 from the government of india to the orissa government which, inter alia, states as follows :- ... as the central issue prices carry a large subsidy, it has been our policy that no unintended benefits should be derived by the state government/union territories or other agencies, on account of the revision of these prices. it is, therefore, requested that all states/uts may take an inventory of the stocks held by them or their nominees as on the date of central price revision and the difference between the old central issue price and the revised price in respect of such stocks which were obtained from the food corporation of india at the old rates but are sold or are intended to be sold to the public in the public distribution system at the revised rates, may be credited to the central government.... (2) letter dated 31-5-1985 from the government of india to the orissa government which, inter alia, states as follows :- i have examined the cost structure of retail distribution of many states. i have been unhappy to find that subsidised foodgrains have been used to raise revenues for the state by levy of taxes, etc. to my mind, there is no justification for doing so, as the supply of foodgrains to the consumer under pds is not a commercial transaction inviting taxation. it is all the more unfortunate because the tax revenues are raised at the cost of the common consumer in the state. (3) letter dated january, 1958 from the state government to the collector, chatrapur (ganjam) which, inter alia, states as follows :- ... consequent on the purchase of stocks of rice and paddy at rates higher than that of last year without corresponding increase in the normal issue prices, it has been decided that the scheme of procurement and distribution should run on 'no-profit no-loss' basis.it was submitted on this evidence that the sale price of the commodities was subsidised, that the public distribution system was not a commercial transaction, and that the scheme of procurement and distribution was to run on 'no-profit no-loss basis'. this, according to him, shows that the assessee-corporation fulfilled the requirement of relief of the poor and serving the general public utility. in this connection, he also pointed out the letter dated 7-11-1989 from the government of india to the orissa government which fixed the margin for sub-wholesalers and retailers to show that the assessee could not by itself fix the price for the same. to a question from the bench whether there was any requirement under the memorandum & articles of association of the assessee to carry out the directives of the government, the learned counsel pointed out article 111 whereunder the government was empowered to give directives to the assessee from time to time in the performance of its functions in matters involving, inter alia, substantial public interest and the assessee was bound to comply with it. he relied upon the decision of the supreme court in the case of cit v. andhra pradesh state road transport corporation [1986] 159 itr 1 wherein it was held that the assessee was entitled to exemption under section 11 because its activity was not carried out with the object of making profit.7. the main submission of the learned counsel was that since the assessee was wholly owned by the government it was a part of the government and so its income was not taxable. he invited us (as he put it) "to tear the veil of the corporation and look to the reality that it was in fact the government". he submitted that the assessee was carrying out government functions. he invited our attention to article 289 of the constitution of india read with entry 34 in the concurrent list. the said article and the entry are reproduced below :- 289. (1) the property and income of a state shall be exempt from union taxation. (2) nothing in clause (1) shall prevent the union from imposing, or authorising the imposition of, any tax to such extent, if any, as parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the government of a state, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. (3) nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which parliament may by law declare to be incidental to the ordinary functions of government.he submitted that the essential commodities act, 1955 had declared the activity of the assessee to be incidental to the ordinary functions of the government, relying upon the following sentence at its beginning :- an act to provide, in the interests of the general public, for the control of the production, supply and distribution of and trade and commerce in certain commodities.8. on the other hand, the learned departmental representative submitted that although the assessee-corporation was owned by the government, it was a separate entity, relying upon the decision of the supreme court in the case of andhra pradesh state road transport corporation v. ito [1964] 52 itr 524. he pointed out from clause 1 of the object clause of the assessee that the assessee's object was to engage either on its own or as the agent of government or any firm, company or institution in the production, purchase, processing, storage, transport, distribution and sale of food-grains, foodstuffs and such other essential commodities as it may choose and to provide assistance, advice and services. he emphasised that the object of serving the poor was not in the object clause and if essential commodities were to be supplied at control prices not only the poor but everybody would benefit. he submitted that the government could give directives generally to traders also regarding sale at control prices and so the face that directives could be given to the assessee-corporation did not make any difference. he further submitted that the assessee had the power, according to the object clause, to lend money and so the requirement of section 11 was not fulfilled because even if one object was not charitable, the benefit thereunder was not available. he submitted that the property of the assessee, that is, the capital, was not held under trust for charitable purposes but for business.9. the assessee's counsel rejoined by first of all trying to distinguish the aforesaid decision of the supreme court in the case of andhra pradesh state road transport corpn. (supra) by submitting that- (i) in that case the government was only one of the shareholders, whereas, here, the government is the only shareholder; and (ii) the argument based on governmental functions was not placed before the court.he also distinguished the decision of the andhra pradesh high court in the case of andhra pradesh state civil supplies corporation ltd. v. c1t [1984] 148 itr 497 relied upon by the departmental representative on the same ground. he also submitted that only the poor people actually benefited by the activity of the corporation as was well known. he finally submitted that the income-tax officer had not discharged the onus to show that the assessee was a taxable entity.10. the learned departmental representative replied that the assessee's claim was that it was a local authority. the income-tax officer had considered that argument and so had the commissioner of income-tax (appeals).11. the decision of the supreme court in the case of andhra pradesh state road transport corporation (supra) states quite clearly that that corporation had a personality of its own distinct from the state or other shareholders and it could not be said that the shareholder carried on the business with which the corporation was concerned.accordingly, the income derived by the corporation from its trading activity could not be claimed by the state which was one of the shareholders of the corporation. it may be true that there were other shareholders in that corporation but the supreme court has clearly stated, as indicated above, that the corporation had a personality of its own distinct from that of the state or other shareholders.therefore, taking into account all the shareholders the corporation remained a separate entity, according to the supreme court.consequently, even if the corporation was controlled by one shareholder, as in this case by the orissa government, it would still remain a separate entity. the court has gone on to say that though the majority of its shares were owned by the government and its activities were controlled by the state, the corporation had still a separate personality of its own. therefore, the factum of full control, as in this case, was taken into account by the supreme court. the later decision of the andhra pradesh high court in the case of andhra pradesh state civil supplies corporation ltd. (supra) was concerned with a case similar to ours. the object of the corporation was similar to that of the present assessee and all the shares were owned by the government.not only that, the board of directors were appointed by the government and they were required to carry out the directives issued by the government from time to time in the management of its affairs. the court held :- that the corporation complied with all the requirements necessary to show that it was an instrumentality of the government. however, it was not the state itself and article 6 of the memorandum of association showed that the income of the corporation did not belong to the state. the corporation was not entitled to exemption under article 289 of the constitution nor could it claim exemption under any general principle of law.this case, therefore, is an authority not only to meet the argument on behalf of the assessee that the assessee-corporation and the government are the same but also that it was entitled to exemption under article 289 of the constitution of india. we are unable to accept the contention of the learned counsel for the assessee that these two authorities, namely, the decision of the supreme court in the case of andhra pradesh state road transport corporation (supra) and that of the andhra pradesh high court in the case of andhra pradesh state civil supplies corporation ltd. (supra), should not be followed because the arguments based on governmental functions advanced by him were not placed before the court. in our view, the court must be said to have considered all aspects and legal issues involved before arriving at its decision.12. further, even considering the argument based on essential governmental functions we cannot accept it. article 289, clause (3) of the constitution of india envisages a declaration that a certain trade or business is incidental to the ordinary functions of the government.therefore, parliament has to make a declaration to that effect. that is not the same thing as making an act such as the essential commodities act. moreover, that act merely states in its preamble what has been quoted above. it shows the purpose of that particular act, namely, the essential commodities act, 1955. it is not a general declaration with respect to any particular trading or business activity as required under the said clause (3) of article 289 of the constitution of india.the learned counsel for the assessee has relied upon entry 34 in the concurrent list; i.e., 'price control'. that entry merely enables both the union and the state government to make laws regarding 'price control'. entry 33 in that list also enables both the union and the state legislatures to make laws regarding, inter alia, foodstuffs. this does not show that the subject-matter of this law is an essential governmental activity. the point is that it may be a government function but may not be an essential government function.13. further, we also agree with the contention of the learned departmental representative that the assessee-corporation cannot be said to be performing the function under section 2(15) of the income-tax act, 1961 because its actual object clause did not make any such provision. the power of the government to give directives under article 111 of the constitution is binding on it. but that does not alter or make any added provision in the object clause. the nature of the assessee has to be judged from its object clause which would define the parameter of its activity. if the nature of the assessee-corporation, that is, charitable or not, was to be judged from the directives given by the government, then in some cases and sometimes the assessee may be an entity having a charitable object and sometimes may not be so. this is an untenable position.14. we are unable to accept the contention of the learned counsel for the assessee that the income-tax officer had not discharged the burden to show that the assessee was not entitled to the exemption claimed.the assessment order clearly shows that the assessee had claimed exemption under section 11 and the income-tax officer had considered it. it was, therefore, for the assessee to show how it was entitled to the exemption claimed. therefore, the assessee's claim to exemption under section 11 must fail.15. the next ground is that the commissioner of income-tax (appeals) has erred in confirming the disallowance of rs. 28,70,786 being a trading loss suffered due to misappropriation by the storage agents.16. the income-tax officer disallowed the assessee's claim on the ground that the matter was subjudice in court had observing that this was not an expense for the purpose of business and secondly stock could still be realisable. the commissioner of income-tax (appeals) confirmed the disallowance on the ground that the assessee in reply to the observations of audit had stated that the amount had been 'provisionally provided' in the profit & loss account and that on receipt of final decision of the court action would be taken accordingly. he, therefore, observed that there was no conscious action taken by the management to write off the amount as irrecoverable loss.he applied the supreme court decision in the case of associated banking corporation of india ltd. v. cit [1965] 56 itr 1, observing that as long as there is a reasonable prospect of recovery of any amount misappropriated, trading loss in a commercial sense cannot be deemed to have resulted. he noted that instances of misappropriation were detected in the financial year 1982-83 and on some occasions as late as march 1983 and one particular case in the subsequent year, i.e., october 1984. action was taken by the assessee for recovery of the loss during the period 1984 to 1986.17. the learned counsel for the assessee relied upon the bombay high court decision in the case of jethabhai hirji & jethabhai ramdas v.cit[1919] 120 itr 792 and submitted that the mere pendency of suits was not a bar to allow the claim for loss.18. on the other hand, the learned departmental representative relied upon the same case as relied upon by the commissioner of income-tax (appeals).19. the assessee's counsel replied that suits would be filed to meet audit objections and no employee in a government corporation would take the risk of not filing suits because he would like to avoid any responsibility later on.20. the loss in this case occurred because the storage agents had misappropriated stock. the assessee was doing business through storage agents in different districts. although it is true that suits were filed, the realisation of dues, if at all, would in such cases be very doubtful and would involve a long time. this is well known. during hearing, we asked the assessee's counsel whether any amount has been realised so far and he replied that nothing has been realised so far.moreover, if any amount is recovered it can be taxed in that year. we, therefore, see no reason why this amount should not be allowed this year. this ground is, therefore, allowed.21. there is a third ground but that is not pressed. accordingly, it is rejected.22. in the department's appeal, the ground raised is that the commissioner of income-tax (appeals) should not have deleted the addition of rs. 19,90,207 made under the head 'shortage'. audit report reveals that there was a shortage of rs. 19,90,207 on purchase of rice from andhra pradesh state civil supplies corporation, and the same was debited to p&l a/c. the assessee failed to file evidence as regards steps taken to realise the said shortage. hence the same is added rs. 19,90,207 5. next the learned counsel challenged disallowance of value of shortage claimed on the basis of the audited report at rs. 19,90,207. the shortage was shown on account of purchase of rice from andhra pradesh state civil supplies corporation (apscsc). as per the report of the auditors vide item 5 of the observation of audit (page 55 of the printed balance-sheet), the above shortage should not have been charged to profit and loss account but should have been recovered from the party responsible for such loss. it was, however, explained by the learned counsel that the shortage worked out to be 0.23% of the total turn-over of rice and such shortage was usual in the process of transportation and handling of bulk goods. the loss could not be attributed to any positive act of negligence or omission on the part of either the suppliers or the transporters. in the circumstances, the same had been correctly charged to revenue account which should have been accepted by the assessing officer. 5.1. on verifying the facts stated above with reference to the observations in the balance-sheet including the explanation offered by the assessee therein, i am of the view that shortage which constituted a negligible percentage of the total turn-over was allowable as a business loss. the addition of rs. 19,90,207 is accordingly deleted.25. the assessee's counsel pointed out that the assessing officer had made the disallowance on the ground that steps were not taken for recovery. however, steps in fact had been taken. he pointed out a letter dated 8-12-1983 from the andhra pradesh state civil supplies corporation ltd. to the assessee wherein, inter alia, it has been stated that there was no default on the part of the millers in loading the exact quantities of rice for the cost paid to them; or the corporation in supervising the loading operations. the letter also states that the transit loss was below 1% which is normal in rail movement over long distance.26. the learned departmental representative submitted that there was no proof regarding the extent of loss generally permissible. however, the aforesaid letter clearly shows that the assessee had taken some steps in trying to recover and also that the loss is below the normal limit.we, therefore, see no reason why this amount should not be allowed.accordingly, the order of the commissioner of income-tax (appeals) on this point is confirmed.27. the cross objection is merely in support of the order of the commissioner of income-tax (appeals). in view of our order in the department's appeal the cross objection becomes infructuous and accordingly it is dismissed.28. in the result, the assessee's appeal is partly allowed, whereas the department's appeal and the assessee's cross objection are dismissed.

Judgment:
1. These cross appeals and cross objection arise out of the same order passed by the Commissioner of Income-tax (Appeals). Therefore, they are dealt with by this common order.

2. The assessee's appeals raises certain legal and constitutional issues of some importance. Those issues arise out of the claim of the assessee to exemption under Section 11 of the Income-tax Act, 1961 and Article 289 of the Constitution of India.

3. The assessment was made after making certain additions by disallowing the assessee's claims for shortage and misappropriation of stock. The assessee had claimed exemption of its income under Sections 11, and 10(20) on the ground of mutuality. The Commissioner of Income-tax (Appeals) confirmed the order of the Income-tax Officer rejecting all these claims. Hence this appeal.

4. Before us, the claim to exemption on the basis of Section 30(20) and mutuality has been given up and, therefore, the only question which arises is the claim to exemption under Section 11.

5. The assessee is a State Government undertaking wholly owned by the Orissa Government and assessed in the status of a company. Its claim to exemption under Section 11 was rejected on the ground that it was not a trust and that no registration was granted to it under Section 12A.6. The learned Counsel for the assessee submitted that although the assessee was not a trust, its case was covered by Explanation 1 to Section 13(4) which provides, inter alia, that for the purpose of Sections 11,12,12A and this section "trust" includes any other legal obligation. According to him, the assessee held its capital amount in trust for certain purposes which resulted in a legal obligation in nature of a trust. He drew our attention to the resolution dated 27-8-1980 of the Orissa Government which states as follows :- With a view to implementing the Scheme of distribution of Essential Commodities and to ensure easy availability of some selected items of essential articles of mass consumption at reasonable prices, the question of establishment of a State Level Civil Supplies Corporation was under consideration of Government for some time past. After careful consideration, Government have been pleased to decide that a Corporation known as "Orissa State Civil Supplies Corporation Ltd.' should be formed with the following broad objective.

To engage either on its own or as the agent of Government or any firm, company or institution in the production, purchase, processing, storage, transport, distribution and sale of foodgrains, foodstuffs and such other essential commodities as it may choose and to provide assistance, advice and services therefore, including capital resources, technical, managerial and other services.

The Corporation will also be responsible for procurement of essential commodities and to deal in these for equitable distribution.

He submitted that this resolution states that the object of establishing the assessee-corporation was to supply essential commodities at reasonable prices and ensure their equitable distribution. Therefore, the object of the assessee was relief of the poor and serving the general public utility as provided in Section 2(15) which defines "charitable purposes". In this connection, he also invited our attention to the following evidence :- (1) Letter dated 20-4-1990 from the Government of India to the Orissa Government which, inter alia, states as follows :- ... As the central issue prices carry a large subsidy, it has been our policy that no unintended benefits should be derived by the State Government/Union Territories or other agencies, on account of the revision of these prices. It is, therefore, requested that all States/UTs may take an inventory of the stocks held by them or their nominees as on the date of central price revision and the difference between the old central issue price and the revised price in respect of such stocks which were obtained from the Food Corporation of India at the old rates but are sold or are intended to be sold to the public in the public distribution system at the revised rates, may be credited to the Central Government....

(2) Letter dated 31-5-1985 from the Government of India to the Orissa Government which, inter alia, states as follows :- I have examined the cost structure of retail distribution of many States. I have been unhappy to find that subsidised foodgrains have been used to raise revenues for the State by levy of taxes, etc. To my mind, there is no justification for doing so, as the supply of foodgrains to the consumer under PDS is not a commercial transaction inviting taxation. It is all the more unfortunate because the tax revenues are raised at the cost of the common consumer in the State.

(3) Letter dated January, 1958 from the State Government to the Collector, Chatrapur (Ganjam) which, inter alia, states as follows :- ... Consequent on the purchase of stocks of rice and paddy at rates higher than that of last year without corresponding increase in the normal issue prices, it has been decided that the scheme of Procurement and Distribution should run on 'No-profit no-loss' basis.

It was submitted on this evidence that the sale price of the commodities was subsidised, that the public distribution system was not a commercial transaction, and that the Scheme of Procurement and Distribution was to run on 'no-profit no-loss basis'. This, according to him, shows that the assessee-corporation fulfilled the requirement of relief of the poor and serving the general public utility. In this connection, he also pointed out the letter dated 7-11-1989 from the Government of India to the Orissa Government which fixed the margin for sub-wholesalers and retailers to show that the assessee could not by itself fix the price for the same. To a question from the Bench whether there was any requirement under the Memorandum & Articles of Association of the assessee to carry out the directives of the Government, the learned Counsel pointed out Article 111 whereunder the Government was empowered to give directives to the assessee from time to time in the performance of its functions in matters involving, inter alia, substantial public interest and the assessee was bound to comply with it. He relied upon the decision of the Supreme Court in the case of CIT v. Andhra Pradesh State Road Transport Corporation [1986] 159 ITR 1 wherein it was held that the assessee was entitled to exemption under Section 11 because its activity was not carried out with the object of making profit.

7. The main submission of the learned Counsel was that since the assessee was wholly owned by the Government it was a part of the Government and so its income was not taxable. He invited us (as he put it) "to tear the veil of the Corporation and look to the reality that it was in fact the Government". He submitted that the assessee was carrying out Government functions. He invited our attention to Article 289 of the Constitution of India read with Entry 34 in the Concurrent List. The said article and the entry are reproduced below :- 289. (1) The property and income of a State shall be exempt from Union taxation.

(2) Nothing in Clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.

(3) Nothing in Clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government.

He submitted that the Essential Commodities Act, 1955 had declared the activity of the assessee to be incidental to the ordinary functions of the Government, relying upon the following sentence at its beginning :- An Act to provide, in the interests of the general Public, for the control of the production, supply and distribution of and trade and commerce in certain commodities.

8. On the other hand, the learned Departmental Representative submitted that although the assessee-corporation was owned by the Government, it was a separate entity, relying upon the decision of the Supreme Court in the case of Andhra Pradesh State Road Transport Corporation v. ITO [1964] 52 ITR 524. He pointed out from Clause 1 of the object clause of the assessee that the assessee's object was to engage either on its own or as the agent of Government or any firm, company or institution in the production, purchase, processing, storage, transport, distribution and sale of food-grains, foodstuffs and such other essential commodities as it may choose and to provide assistance, advice and services. He emphasised that the object of serving the poor was not in the object clause and if essential commodities were to be supplied at control prices not only the poor but everybody would benefit. He submitted that the Government could give directives generally to traders also regarding sale at control prices and so the face that directives could be given to the assessee-corporation did not make any difference. He further submitted that the assessee had the power, according to the object clause, to lend money and so the requirement of Section 11 was not fulfilled because even if one object was not charitable, the benefit thereunder was not available. He submitted that the property of the assessee, that is, the capital, was not held under trust for charitable purposes but for business.

9. The assessee's Counsel rejoined by first of all trying to distinguish the aforesaid decision of the Supreme Court in the case of Andhra Pradesh State Road Transport Corpn. (supra) by submitting that- (i) in that case the Government was only one of the shareholders, whereas, here, the Government is the only shareholder; and (ii) the argument based on governmental functions was not placed before the Court.

He also distinguished the decision of the Andhra Pradesh High Court in the case of Andhra Pradesh State Civil Supplies Corporation Ltd. v. C1T [1984] 148 ITR 497 relied upon by the Departmental Representative on the same ground. He also submitted that only the poor people actually benefited by the activity of the Corporation as was well known. He finally submitted that the Income-tax Officer had not discharged the onus to show that the assessee was a taxable entity.

10. The learned Departmental Representative replied that the assessee's claim was that it was a local authority. The Income-tax Officer had considered that argument and so had the Commissioner of Income-tax (Appeals).

11. The decision of the Supreme Court in the case of Andhra Pradesh State Road Transport Corporation (supra) states quite clearly that that Corporation had a personality of its own distinct from the State or other shareholders and it could not be said that the shareholder carried on the business with which the Corporation was concerned.

Accordingly, the income derived by the Corporation from its trading activity could not be claimed by the State which was one of the shareholders of the Corporation. It may be true that there were other shareholders in that Corporation but the Supreme Court has clearly stated, as indicated above, that the Corporation had a personality of its own distinct from that of the State or other shareholders.

Therefore, taking into account all the shareholders the Corporation remained a separate entity, according to the Supreme Court.

Consequently, even if the Corporation was controlled by one shareholder, as in this case by the Orissa Government, it would still remain a separate entity. The Court has gone on to say that though the majority of its shares were owned by the Government and its activities were controlled by the State, the Corporation had still a separate personality of its own. Therefore, the factum of full control, as in this case, was taken into account by the Supreme Court. The later decision of the Andhra Pradesh High Court in the case of Andhra Pradesh State Civil Supplies Corporation Ltd. (supra) was concerned with a case similar to ours. The object of the Corporation was similar to that of the present assessee and all the shares were owned by the Government.

Not only that, the Board of Directors were appointed by the Government and they were required to carry out the directives issued by the Government from time to time in the management of its affairs. The Court held :- That the Corporation complied with all the requirements necessary to show that it was an instrumentality of the Government. However, it was not the State itself and Article 6 of the memorandum of association showed that the income of the Corporation did not belong to the State. The Corporation was not entitled to exemption under Article 289 of the Constitution nor could it claim exemption under any general principle of law.

This case, therefore, is an authority not only to meet the argument on behalf of the assessee that the assessee-corporation and the Government are the same but also that it was entitled to exemption under Article 289 of the Constitution of India. We are unable to accept the contention of the learned Counsel for the assessee that these two authorities, namely, the decision of the Supreme Court in the case of Andhra Pradesh State Road Transport Corporation (supra) and that of the Andhra Pradesh High Court in the case of Andhra Pradesh State Civil Supplies Corporation Ltd. (supra), should not be followed because the arguments based on governmental functions advanced by him were not placed before the Court. In our view, the Court must be said to have considered all aspects and legal issues involved before arriving at its decision.

12. Further, even considering the argument based on essential governmental functions we cannot accept it. Article 289, Clause (3) of the Constitution of India envisages a declaration that a certain trade or business is incidental to the ordinary functions of the Government.

Therefore, Parliament has to make a declaration to that effect. That is not the same thing as making an Act such as the Essential Commodities Act. Moreover, that Act merely states in its preamble what has been quoted above. It shows the purpose of that particular Act, namely, the Essential Commodities Act, 1955. It is not a general declaration with respect to any particular trading or business activity as required under the said Clause (3) of Article 289 of the Constitution of India.

The learned Counsel for the assessee has relied upon entry 34 in the Concurrent List; i.e., 'price control'. That entry merely enables both the Union and the State Government to make laws regarding 'price control'. Entry 33 in that list also enables both the Union and the State Legislatures to make laws regarding, inter alia, foodstuffs. This does not show that the subject-matter of this law is an essential governmental activity. The point is that it may be a Government function but may not be an essential Government function.

13. Further, we also agree with the contention of the learned Departmental Representative that the assessee-corporation cannot be said to be performing the function under Section 2(15) of the Income-tax Act, 1961 because its actual object clause did not make any such provision. The power of the Government to give directives under Article 111 of the Constitution is binding on it. But that does not alter or make any added provision in the object clause. The nature of the assessee has to be judged from its object clause which would define the parameter of its activity. If the nature of the assessee-corporation, that is, charitable or not, was to be judged from the directives given by the Government, then in some cases and sometimes the assessee may be an entity having a charitable object and sometimes may not be so. This is an untenable position.

14. We are unable to accept the contention of the learned Counsel for the assessee that the Income-tax Officer had not discharged the burden to show that the assessee was not entitled to the exemption claimed.

The assessment order clearly shows that the assessee had claimed exemption under Section 11 and the Income-tax Officer had considered it. It was, therefore, for the assessee to show how it was entitled to the exemption claimed. Therefore, the assessee's claim to exemption under Section 11 must fail.

15. The next ground is that the Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs. 28,70,786 being a trading loss suffered due to misappropriation by the storage agents.

16. The Income-tax Officer disallowed the assessee's claim on the ground that the matter was subjudice in Court had observing that this was not an expense for the purpose of business and secondly stock could still be realisable. The Commissioner of Income-tax (Appeals) confirmed the disallowance on the ground that the assessee in reply to the observations of Audit had stated that the amount had been 'provisionally provided' in the Profit & Loss Account and that on receipt of final decision of the Court action would be taken accordingly. He, therefore, observed that there was no conscious action taken by the management to write off the amount as irrecoverable loss.

He applied the Supreme Court decision in the case of Associated Banking Corporation of India Ltd. v. CIT [1965] 56 ITR 1, observing that as long as there is a reasonable prospect of recovery of any amount misappropriated, trading loss in a commercial sense cannot be deemed to have resulted. He noted that instances of misappropriation were detected in the financial year 1982-83 and on some occasions as late as March 1983 and one particular case in the subsequent year, i.e., October 1984. Action was taken by the assessee for recovery of the loss during the period 1984 to 1986.

17. The learned Counsel for the assessee relied upon the Bombay High Court decision in the case of Jethabhai Hirji & Jethabhai Ramdas v.CIT[1919] 120 ITR 792 and submitted that the mere pendency of suits was not a bar to allow the claim for loss.

18. On the other hand, the learned Departmental Representative relied upon the same case as relied upon by the Commissioner of Income-tax (Appeals).

19. The assessee's Counsel replied that suits would be filed to meet audit objections and no employee in a Government Corporation would take the risk of not filing suits because he would like to avoid any responsibility later on.

20. The loss in this case occurred because the storage agents had misappropriated stock. The assessee was doing business through storage agents in different districts. Although it is true that suits were filed, the realisation of dues, if at all, would in such cases be very doubtful and would involve a long time. This is well known. During hearing, we asked the assessee's Counsel whether any amount has been realised so far and he replied that nothing has been realised so far.

Moreover, if any amount is recovered it can be taxed in that year. We, therefore, see no reason why this amount should not be allowed this year. This ground is, therefore, allowed.

21. There is a third ground but that is not pressed. Accordingly, it is rejected.

22. In the department's appeal, the ground raised is that the Commissioner of Income-tax (Appeals) should not have deleted the addition of Rs. 19,90,207 made under the head 'Shortage'.

Audit report reveals that there was a shortage of Rs. 19,90,207 on purchase of rice from Andhra Pradesh State Civil Supplies Corporation, and the same was debited to P&L a/c. The assessee failed to file evidence as regards steps taken to realise the said shortage. Hence the same is added Rs. 19,90,207 5. Next the learned counsel challenged disallowance of value of shortage claimed on the basis of the audited report at Rs. 19,90,207. The shortage was shown on account of purchase of rice from Andhra Pradesh State Civil Supplies Corporation (APSCSC). As per the report of the auditors vide item 5 of the observation of audit (page 55 of the printed balance-sheet), the above shortage should not have been charged to profit and loss account but should have been recovered from the party responsible for such loss. It was, however, explained by the learned counsel that the shortage worked out to be 0.23% of the total turn-over of rice and such shortage was usual in the process of transportation and handling of bulk goods. The loss could not be attributed to any positive act of negligence or omission on the part of either the suppliers or the transporters. In the circumstances, the same had been correctly charged to revenue account which should have been accepted by the assessing officer.

5.1. On verifying the facts stated above with reference to the observations in the balance-sheet including the explanation offered by the assessee therein, I am of the view that shortage which constituted a negligible percentage of the total turn-over was allowable as a business loss. The addition of Rs. 19,90,207 is accordingly deleted.

25. The assessee's Counsel pointed out that the assessing officer had made the disallowance on the ground that steps were not taken for recovery. However, steps in fact had been taken. He pointed out a letter dated 8-12-1983 from the Andhra Pradesh State Civil Supplies Corporation Ltd. to the assessee wherein, inter alia, it has been stated that there was no default on the part of the millers in loading the exact quantities of rice for the cost paid to them; or the Corporation in supervising the loading operations. The letter also states that the transit loss was below 1% which is normal in rail movement over long distance.

26. The learned Departmental Representative submitted that there was no proof regarding the extent of loss generally permissible. However, the aforesaid letter clearly shows that the assessee had taken some steps in trying to recover and also that the loss is below the normal limit.

We, therefore, see no reason why this amount should not be allowed.

Accordingly, the order of the Commissioner of Income-tax (Appeals) on this point is confirmed.

27. The cross objection is merely in support of the order of the Commissioner of Income-tax (Appeals). In view of our order in the Department's appeal the cross objection becomes infructuous and accordingly it is dismissed.

28. In the result, the assessee's appeal is partly allowed, whereas the Department's appeal and the assessee's cross objection are dismissed.